The Carbon Pollution Reduction Scheme (CPRS) is the Government’s primary policy tool to reduce Australia’s greenhouse emissions.

The CPRS is a “cap and trade” emissions trading scheme. It is not a carbon tax. A “cap and trade” emissions trading scheme operates by placing a limit on the total emissions allowed from certain activities or sectors covered by the scheme. This limit is generally set below what it would be under "business as usual". The emissions subject to the cap are referred to as the ‘covered’ sectors.

Companies or entities covered by the scheme are required to obtain permits to cover their annual emissions. Permits can either be bought through an auction process or may be obtained through free allocation by the Government. Each permit equals one tonne of CO2-e. Sufficient permits to cover an entity’s emissions will need to be surrendered each year to the Government. Penalties apply for non compliance.

The intention behind “cap and trade” emissions trading schemes is to allow emissions reductions to be achieved in the most cost effective way. For example, if it is cheaper for an emitter to implement emissions reduction technology within its operations, rather than buy carbon permits, it is expected that this is the route that will be pursued by that emitter.